GE heads for junk heap

The conglomerate is making little progress reducing a debt mountain that could destabilise the wider corporate bond market. Marina Gerner reports.

General Electric (GE) was once America’s most valuable company. Today, says Patti Domm on CNBC, it is “fighting to stay off the junk heap”. The company has about $115bn in debt and it recently lost its coveted single-A credit rating. Its bonds are already trading as if they were junk-rated – the yield on its five-year bond has jumped to 6.2%. Meanwhile GE posted a loss of $22.8bn in the third quarter, among the largest in US corporate history.

Once lauded for its consistent dividends, the company slashed its quarterly dividend to just a penny in October. A few days ago, JPMorgan downgraded its outlook for the 126-year conglomerate, citing weak earnings and cash flow, while the group said it was urgently pursuing asset sales. The shares slipped another 10%.

GE’s current struggle follows a series of missteps since the turn of the century. By then it had become a behemoth encompassing jet engines, power turbines, medical hardware and financial services. The latter almost sank it during the crisis of 2008, since when GE has since been trying, with limited success, to streamline the group. “There are too many lines of business,” Morningstar’s Josh Aguilar told the New Jersey Herald. “They tried to do too many things for too many people.”

A new era?

GE continues to struggle. Larry Culp has only been leading GE for just over a month, but he looks likely to fall “into a familiar pattern”, says Tom Buerkle on Breakingviews. Previous CEOs lost investors’ confidence by consistently “missing targets and failing to draw a clear line” under GE’s problems.

Culp may not make as much progress as he hopes towards whittling down the debt pile – the planned sale of GE’s stake in oil group Baker Hughes is already set to bring in 25% less than estimated in June owing to the sliding oil price. Arranging a flotation of the healthcare business will take time. And there is little sign of progress in the power business: in 2015, just as demand for gas-fired electricity-generating turbines was peaking, GE bought France’s Alstom. The upshot? A $22bn write-down.

“GE’s financial troubles are self-inflicted, not a sign of broader problems in the economy,” as James Mackintosh says in the Wall Street Journal. But it is still the sixth-most indebted non-financial company in the world, followed by Volkswagen, Toyota, AT&T, SoftBank, Ford and Daimler. GE is “big enough to shake the entire market” if the bonds get downgraded to junk. Corporate bonds look very vulnerable to a shock-induced slump.

Since the financial crisis, US non-financial companies have gone on a borrowing spree fuelled by cheap money. As a result, their debt stands at a record of more than 73% of GDP, up from 65% in 2008. Meanwhile, the quality of loans and bonds has deteriorated, adds Buerkle. “Rising interest rates and slowing growth could make this a big problem.”

Carlos Ghosn’s latest pay scandal

Carlos Ghosn has long been “lionised in business circles”, say David Gelles and Motoko Rich in The New York Times. But now Ghosn has suffered a “shocking comeuppance”. He allegedly under-reported his compensation between 2011 and 2015 to the tune of $44.5m.

Ghosn specialises in reviving seemingly moribund companies, notes Bloomberg. In the mid-1990s, he slashed costs at Renault and restored profitability. That earned him the nickname “Le Cost Killer”, which “annoys him to this day”. When Nissan teetered on the brink of bankruptcy a few years later, “Ghosn repeated the trick”. Now he has engineered an alliance comprising Nissan, Renault and Mitsubishi, with himself at the centre. He is also “familiar with pay scandals”, says Liam Proud on Breakingviews.

In 2017, Reuters reported that Renault-Nissan bankers drew up plans to channel undisclosed bonuses to him and other managers. This year his €7.4m annual pay at Renault just about managed to get approved by shareholders, despite opposition from the French government, which owns 15% of the company. The current scandal is worse. “It’s hard to imagine the French state continuing to back him at Renault, even if Ghosn escapes punishment in Japan.”

As for the wider corporate ramifications, says Nils Pratley in The Guardian, Nissan boss Hiroto Saikawa appeared to be “making a straightforward power play” by criticising Ghosn’s management style when he reported the allegations. “Expect a Franco-Japanese bunfight for control of the alliance.”

City talk

• Société Générale is to be fined $1.3bn for violating US sanctions, concluding a case “that has long hung over the French bank”, says the Financial Times. According to US authorities, SocGen had executed billions of dollars of illegal and opaque transactions between 2003-2013 with entities in countries subject to embargoes, including Iran, Sudan, Cuba and Libya. The bank said the fine “is entirely covered by the provision for disputes” and won’t affect 2018’s results.

• EasyJet’s chief executive has issued a “Darwinian call”, says Oliver Gill in The Daily Telegraph. Johan Lundgren, who took over as CEO of the FTSE 100 company a year ago, said larger airlines are poised to prosper while weaker rivals would “disappear”. He added that so far Brexit has led to “no drop in demand” for bookings next year. His announcement came as the company’s annual pre-tax profits rose by 15.6%. However, costs look set to rise – Hargreaves Lansdown’s analyst George Salmon says the boost from cheap fuel “is fading… and revenue per seat will dip”.

• Chinese smartphone maker Xiaomi would like to be an internet player, but it “has been unable to shed its reputation for being basically a smartphone maker”, says Tim Culpan on Bloomberg. The group now seems to have accepted this, announcing the takeover of rival smartphone group Meitu this week. It has managed to exploit Meitu’s financial troubles to buy the brand “without spending a dime”. Instead, a “savvy licensing deal” will see Xiaomi pay its peer 10% of the profit it makes from each Meitu smartphone for five years, in return for taking over the R&D, production and sales of the brand.